Demonetisation is a big reform as it expands the Gross Domestic Product (GDP) and makes it cleaner. It pushes revenues; pushes economy pushes more money into the banking system. Deposits are encouraged by opening accounts and financial inclusion bolstered. This is good for the reeling banking sector and for the economy as deposits help in lending loans. Higher deposits may lead to lowering interest rates. This move is an effective way to make the country cashless.
Need for Demonetisation: The incidence of fake Indian currency notes of higher denomination has increased. As per a study done by the Indian Statistical Institute, Kolkata in 2015, the only concrete work done on the subject, at any given point of time, `400 crore worth of fake currency notes were in circulation in the economy. This is merely 0.025 per cent of the total budget outlay of `19.7 lakh crore as announced this fiscal. According to the National Crime Records Bureau (NCRB) in 2015, various law enforcement agencies seized 1,78,022 pieces of fake `1000 currency notes. This means `17 crore fake notes which were in circulation could be circulated as they could be seized. Similarly, in 2015 as many as 2, 99,524 pieces of `500 fake notes were seized by the agencies.
For ordinary persons, the fake notes, even though no security feature has been copied. The fake notes are used for anti-national and illegal activities. High denomination notes have been misused by terrorists and for hoarding black money. India remains a cash-based economy hence the circulation of fake Indian currency notes continues to be a menace. In media news, cash is found in pillows, beds, false ceilings, warehouses and even toilets. In order to contain the rising incidence of fake notes and black money, the demonetisation scheme has been declared by our Prime Minister.
Saga of Demonetisation: The pre-Independence government of India passed the High Denomination Bank Notes (Demonetisation) Ordinance on January 12, 1946. After Independence, the first demonetisation was in 1956 when all notes carrying the British Monarch’s head were withdrawn. The second came in January 1978 by Morarji Desai when `1000, `5000 and `10,000 denominations were demonetised. India is not the only country to have opted for currency demonetisation. There are similar examples from other countries as well such as in Zimbabwe (2008), in Singapore (1945), in Fiji (1969) and in Philippines (1985).
Impact: The demonetisation of `500 and `1000 notes is likely to be disruptive in the short-run but in the medium to long-run it will make economy more formal with significant gains in terms of demand boost and investment activity. It will change the social culture in the way people keep money and spend, give a boost to the economy.
Short- term Impact: Demonetisation move will almost certainly lead to growth deceleration in the short term. Economic growth in third quarter could be affected, especially in rural areas. November and December 2016 could see a slowdown in growth.
The move to withdraw high-denomination notes is expected to dent immediate consumption, especially of high-end goods. The sudden decline in money supply and simultaneous increase in bank deposits is going to adversely impact consumption demand in the economy in the short-term. Robust urban demand, which has been driving the economy, could take an immediate hit, possibly providing to be a drag on growth.
Sectors with a sizeable magnitude of cash transaction such as real estate, construction, jewellery, high-end retail and travel and tourism are expected to get adversely affected. Low growth in real estate could have a cascading effect on the steel and cement sectors.
Largely cash-based rural economy could see a sharp fall in transactions. Mobile phone and white goods demand to take a hit. Booming automobile sector could see drop in buys. House buying selling is out for a while.
It will force those businesses which were hitherto operating in the shadows to come out into the reporting domain. Some of the sectors which were endemic generators of cash were supporting unorganised players engaged in sectors such as building material, piping and plastic, chemicals, dairy products, jewellery, hospitals and diagnostics, auto, ancillaries and forging, non-banking financial companies, apparels, footwear, etc. This will in turn, show up for the first time in Gross Domestic Products numbers.
This demonetisation move have impact on upcoming polls in Uttar Pradesh and Punjab because influencing votes in return through bribes is very difficult.
The Demonetisation will have a positive impact on growth and inflation in the long run. Demand boost from more money in circulation because black money that can be put to use will be spent, some money will return to banks and become part of formal economy, money will go to poor as people use proxies to launder black money, lower property prices will boost housing demand and construction.
The government’s move to demonetise the economy will help check inflation and there will be a surge in bank deposits. Transactions will now begin to move to white economy through the banking system which means there will be a surge in bank deposits will go up. As the black money goes out of the system, the money supply will shrink to some extent. This will reduce inflation rate in the absence of any open market interventions by the Reserve Bank of India.
The economy will benefit from the reduction in black money as it will lead to higher tax collection, better business environment, less corruption, and a greater transparency. Tax collections would increase deposits will increase in banks and their capacity to support economy will increase.
To sum up, the bold stroke of demonetisation may rattle people but it will definitely inject dynamism in the moribund economy. It will eliminate the counterfeit notes in circulation and bring money-holders under the scanner to a large extent. It will also help us move towards a cashless economy.
